Can I deduct state sales tax on my federal income tax return?
If you itemize deductions on Schedule A of IRS Form 1040, you are generally able to deduct state and local taxes including income tax, real property tax and personal property tax. For 2011, if it works to your benefit, you can elect to deduct state and local general sales tax in lieu of state and local income tax. One thing to keep in mind: if your total itemized deductions don’t exceed your standard deduction amount (for 2011, as an example, a married couple filing a joint federal income tax return would typically be able to claim a standard deduction of at least $11,600), you generally won’t get any additional tax benefit from deductions you claim on Schedule A.
When claiming a deduction on Schedule A for state and local sales tax, you have two options. You can deduct the amount that you actually paid in sales tax, as evidenced by receipts that you have accumulated showing amounts paid. Alternatively, you can use tables published by the IRS that are based on average consumption in each state, and factor in modified gross income (AGI) and number of exemptions you take. Even if you use the optional tables you’re still generally able to deduct the sales tax on certain specified items, like cars, boats or an airplane.
One caution here: special rules apply to married couples who file separate federal income tax returns. If both you and your spouse elect to deduct state and local sales tax in lieu of income tax, and your spouse elects to use the optional state sales tax tables, you’ll have to use the tables as well.
Things can get a little more complicated if you lived in more than one state during the year or if the sales tax rate for the state in which you live changed during the year. Currently the ability to deduct state and local sales tax in lieu of income tax expires at the end of 2011. And if you’re subject to the alternative minimum tax (AMT), the AMT rules may limit the deductions available to you, including the deduction for state and local taxes.
For additional information, call our office (425-373-6210) and talk to our tax professional, or see IRS Publication 600 State and Local General Sales Tax, and the instructions for IRS Form 1040: Schedule A.